Perquisite - unanswered questions to pose problems.

[C.A. DEV KUMAR KOTHARI]

CIT Vs. Kirtivan D. Kotian 2010 -TMI - 77172(KAR)

a fit case for  rectification and appeal before the Supreme Court:

In this case before Karnataka High Court matter relating to validity of reassessment to include as perquisites the difference in issue price charged to assessee and to some other shareholder came for consideration with the following questions of law:  

"1. Whether the Tribunal was correct in holding that the reopening of assessments made by the Assessing Officer was without jurisdiction; as it was on account of mere change of opinion when admittedly during the course of assessment of M/s. Manikya Plastichem Pvt. Ltd. it was detected that equity shares worth Rs. 25 had been sold in favour of the assessee at Rs. 10 and the difference had escaped assessment which was liable to be taxed in accordance with the amended section 147 of the Act?

2. Whether the Tribunal was correct in holding that the transfer of shares by M/s. Manikya Plastichem Pvt. Ltd., the employer in favour of the assessee at a lower rate than that of the market value would not amount to perquisite as the assessee did not acquire any vested right as enunciated by the apex court in CIT v. L.W. Russel 2008 -TMI - 49362 - SUPREME Court.

3. Whether the Assessing Officer was correct in bringing to tax the difference in acquiring shares at Rs. 10 when compared to the market value at Rs. 25 as a perquisite in accordance with section 17(2)(iii)(c) of the Act read with Board Circular No. 710, dated July 24, 1995{ [1995] 215 ITR (St.) 1.}?"

From reading of the above questions it is clear that the revenue has not challenged the facts found by the tribunal as perverse. Therefore, the facts as found by the Tribunal must be regarded as final and the questions should, generally be answered on the legal issues only.

This appeal is on behalf of the revenue.

In the first question decision of ITAT on holding the reassessment proceedings as invalid is challenged. The second question is on decision of ITAT holding that the price difference is not perquisite. And the third question is in fact on the action of the AO and arising from the order of the AO and it cannot really be regarded as question arising from the order of Tribunal.

Apparent mistake in the submissions of counsels and also judgment:

 The first question is on jurisdiction aspects. In the normal course of the decision making the High Court would have first decided the first question. In case the High Court confirmed the decision of ITAT and held that reassessment was not proper, then the High Court would not have answered other questions. This is because when the reassessment is set aside then the appeal court need not to decide upon other questions. It appears that the Tribunal had allowed appeal of the assessee on all grounds including on aspect of reassessment being void as based on mere change of opinion and also on the issue that the difference of price of shares issued to assessee and some other parties during the same year was not perquisite. In fact the Tribunal could have decided the appeal on issue of reassessment and left other aspects undecided since reassessment was set aside.

Similarly if the High court answers question no. 1 against the revenue and in favour of assessee, (that means that High Court holds that reassessment was without jurisdiction), then only there would be no need to answer question nos. 2 and 3 because if the reassessment proceedings are found without jurisdiction, and set aside then the original assessment shall remain the only order. Therefore, the court will not be required to answer questions nos. 2 and 3 which pertains to merit of additions made in reassessment order. 

Mistakes of counsels:

From reading of the judgment it appears that either the counsels of assessee and revenue both have made wrong admittance or that there is a mistake in the judgment to the extent of the following observations of the court:

"…. At the outset, counsel for both the parties submit that if this court considers question No. 1 in favour of the Revenue, questions Nos. 2 and 3 need not be considered by this court as those questions would only be academic in nature. In the circumstances, we have to consider question No. 1 formulated by the Revenue."

As discussed by the author, in this case, there is apparently a mistake in the above statement, because if question no. 1 is decided in favor of revenue, by holding that reassessment was proper, then only other questions need to be decided and answered. The court has also passed the judgment on the basis of above wrong statement made by counsels.  In decision portion the High Court has held that:

"In the circumstances, we have to answer question No. 1 in favour of the Revenue. Therefore, we are not required to consider questions Nos. 2 and 3 as per the statement made by the counsel for the Revenue."

From the above observations of the high Court we find that at first the court has stated that counsels of both parties have admitted, whereas in order portion it is stated that as per statement made by the counsel of the revenue.

Approach of the counsel of assessee:

It seems that the counsel of assessee has taken approach that if reassessment proceedings are confirmed by answering first question in favor of revenue and other questions are not answered, then the facts found by the Tribunal on merits shall remain in favor of the assessee. However, while answering the question no. 1 on issue of reassessment the High Court has also held that the difference in price charged to assessee and to other party was perquisite. Therefore, it may create doubts and the revenue will try to submit that the court has also decided on merit that the difference is taxable and that's why the high court has set aside the order of ITAT and restored the orders of the AO and CIT(A). Therefore, it would be proper for the assessee to apply to the High Court to consider the other questions also and also to prefer appeal before the Supreme Court. 

At this stage author feels that it was duty of the counsel of the revenue to insists for decision on other questions as well. Now we find that the High Court has held that reassessment was valid. However High Court has not decided other questions which were on issue of merits. Therefore, the decision of the Tribunal which was in favor of assessee remain intact, as non-challenged or challenged but not contested by the counsel of the revenue.

Once the question no. 1 is decided in favor of revenue that is confirming action of reassessment, there was need to answer other questions on aspects of addition made in reassessment order. This is because now reassessment has been upheld. The Tribunal has allowed appeal of assessee in entirety that is on issue of reassessment as well as on ground to delete addition. The decision of tribunal on issue of reassessment has been reversed, but the decision on issue of taxable perquisite has not been answered and disturbed by the High Court, though while answering first question the High Court has also observed on taxability of difference as perquisite.

Therefore it is a fit case for review by High Court itself to rectify the mistake and to consider the second question on the issue of price difference taxable as perquisite. Otherwise the proceedings by way of appeal before the high Court will remain unfruitful and there will be counter arguments from both sides.

Another point of view:

Another point of view is that the first question was on a legal issue which has been decided by the high Court in favour of revenue. The other questions were merely on questions of facts, and the fact found by Tribunal remain final and conclusive. However, in the judgment high court has set aside the order of ITAT and restored orders of CIT(A) and AO. That makes the order of the High Court confusing and prone to different interpretations. The following conclusions of the High Court are important:

"Therefore, we are of the opinion that the Tribunal was not justified in allowing the appeal of the assessee as the assessee has been benefited as contemplated under section 17(2)(iii) of the Act. In the circumstances, we have to answer question No. 1 in favour of the Revenue. Therefore, we are not required to consider questions Nos. 2 and 3 as per the statement made by the counsel for the Revenue".

Thus we find that on the one hand the High Court says that the assessee has been benefited  as contemplated in section 17(2)(iii) and on the other hand court says that questions nos. 2 and 3 are not answered. This makes the hole matter confusing.

Tribunals findings analyzed from para 5 of the judgment:

a.       The Tribunal having heard the parties,

b.       found that the shares were allotted to the assessee as a promoter of the company

c.        held that the shares were allotted to him pursuant to the agreement dated November 9, 1995,

d.      the appeal of the assessee was allowed

e.       the order passed by the Commissioner of Income-tax (Appeals) as well as the Assessing Officer were set aside.

Courts observations and findings as given in paragraphs 7- 11 are analyzed below:

7. We have heard the counsel for both the parties.

8. At the outset, counsel for both the parties submit that if this court considers question No. 1 in favour of the Revenue, questions Nos. 2 and 3 need not be considered by this court as those questions would only be academic in nature. In the circumstances, we have to consider question No. 1 formulated by the Revenue.

9. Having heard the counsel for both the parties, we notice that it is not in dispute that the respondent-assessee is an employee of M/s. Manikya Plastichem Pvt. Ltd. According to him, he is also a director of the company. A copy of the agreement entered into between TDICI and M/s. Manikya Plastichem Pvt. Ltd. dated November 9, 1995, is also produced before us. Learned counsel for the assessee relying upon special condition (2) of the agreement contends that the assessee has been allotted shares at the rate of Rs. 10 since he happens to be an associate of a promoter of the company. Therefore, he contends that the question of law framed by the Revenue has to be answered against it in view of the findings of the Tribunal.

10. Mr. Seshachala, counsel for the Revenue, contends that the assessee herein is only an employee-cum-director and not a promoter. He being not a promoter of the company, he cannot rely upon the agreement to get the benefit and to avoid tax. According to him, agreement dated November 9, 1995, cannot be considered in view of the specific provision under section 17(2)(iii) of the Act and the circular issued by the Department in regard to the allotment of shares by a company to its employees.

11. Though the Tribunal has given a finding that shares have been allotted to the assessee by virtue of the agreement dated November 9, 1995, in favour of the assessee as a promoter of the company, on facts he cannot be considered as a promoter of M/s. Manikya Plastichem Pvt. Ltd. Though the counsel for the assessee has relied upon the word "promoters and associates", we are afraid to accept the argument advanced by the counsel for the assessee since the word "associates" can include any person not only an employee of the or director of the company, but it includes any person as an associate. The assessee being an employee of the company, having got allotted 50,000 shares at the rate of Rs. 10 each, we are of the opinion that he has been benefited out of such allotment when the same shares are sold at the rate of Rs. 25 per share. We are of the opinion that the Tribunal without considering the facts of the case and without appreciating the words "promoters and associates" at par as envisaged in special condition (2) has allowed the appeal of the assessee wrongly. Therefore, we are of the opinion that the Tribunal was not justified in allowing the appeal of the assessee as the assessee has been benefited as contemplated under section 17(2)(iii) of the Act. In the circumstances, we have to answer question No. 1 in favour of the Revenue. Therefore, we are not required to consider questions Nos. 2 and 3 as per the statement made by the counsel for the Revenue.

12. In the result, we allow this appeal and set aside the order passed by the Tribunal and confirm the order passed by the Assessing Officer as well as the Commissioner of Income-tax (Appeals).

Aspects on merits:

Shares issued to employee at lower price - perquisite - points missed by counsels:

It seems that due to wrong approach of counsels of revenue as well assessee the court did not answer second question which was important on the issue. This is likely to cause counter claims of both parties and matter will involve litigation. It would have been better approach of the counsel of the assessee to pray the court to consider second question. On this aspects the following points should have been pressed:

As to promoter and associated promoters:

a.       In commercial world and particularly corporate structure of management in the area of financing promoter also include associate of main promoters. There is always reshuffling of promoters from time to time. The role of person as contributor of capital, contributor of time and devotion and a risk taker are basics of a promoter. There can be different promoters for different projects taken by a company. Initially subscribers to the Memorandum and Articles of company are called as promoters of company, however, over a period of time they may no longer remain promoter of any project of the company.

b.      justification of lower price charged to director - employee who is promoter. This can be due to specific terms and conditions at the time of allotment and applicable thereafter, point of time, fundamental changes between two points of time when shares were issued to director and other persons.

c.       A person can have multiple positions- a director, a promoter, an associate promoter as well as employee.

d.      That director though employee was a promoter of the project being undertaken by company.

Shares price:

Share price of share in any company can widely fluctuate depending on fortunes of the company and the industry in which it operates. We find wide fluctuation in price of shares of companies which are listed on stock exchanges. Within a period of one year we find ratio or highest price and lowest price in a significant manner. In volatile times ratio of three can be considered as average ratio. In many cases the ratio of H/L is found more than 10. During 52 week ended 10.09.10  economy has not seen much upheaval and there is stability therefore share markets have also not been very volatile, still we find that there is significant difference in high and low prices of shares. For example we can take examples of some of companies which include public sector companies, very widely held companies and not so widely held companies from some of industries as follows:

Name of company	52week High	52 Week low
SHIPPING CORP OF INDIA LT	181.90	123.15	1.48
Scooter India Ltd	50.45	17.60	2.86
MTNL	95.90	51.80	1.85
BEML	1275	913	1.40
Andrew Yule	99.70	31.50	3.16
HCL INFOSYSTEMS LTD	188.80	102.30	1.85
Infosys	2911	2127	1.37
Satyam Computers	124.70	78.55	1.59
Gallant Metal	45.40	13.70	3.31
BIHAR SPONGE IRON LTD	14.30	8.55	1.67
Ledo Tea	101.60	45.75	2.22
Assam Co.	28	15.30	1.83
ROSELL TEA LIMITED	407.15	50	8.14
BIRLA CORPORATION LTD	422.20	267.10	1.58
SHREE CEMENTS LTD	2542	1372	1.85

 The factors causing fluctuation in price of share are same:

Whether a company is listed or not , the factors which cause fluctuation in price of share are same- the economy in general, prospects of company, prospects of products of company, price of finished goods and raw material, cost of power and fuel, government policies, monsoon effects on prices and demand of products and raw material etc. There is only difference in size of market for shares of various companies for example some are traded worldwide, some on all India basis and some on regional basis. In case of private or closely held companies the market is further narrowed, however, the factors which affect the price are same. Therefore, even in case of a private company the share price may fluctuate widely within as short period of time.

Effect of other terms and conditions:

Share price, particularly when a preferential issue is made can also be affected due to some managerial reasons like:

Restriction on transfer of shares within a defined group of persons or subject to approval of transferee by the management of company.

Larger sum is required to be invested and not smaller sums.

Lock-in - period is prescribed during which the share cannot be transferred or cannot be freely transferred.

Undertaking to banks, FI's and other directors not to divest holding during certain period.

Difference in issue price:

Therefore, there can be valid reasons for difference in issue price of shares if the issue take place at different times and with different terms and conditions.  Issue of shares at different price at two times within a year does not mean that the price charged to once is favorable in comparison to price charged to other to whom shares are issued at a higher price.

The assessee should take proper action by making application before High Court for further directions and if the High Court does not entertain it then the assessee can approach the Supreme Court.

2010 -TMI - 77172 - KARNATAKA HIGH COURT